Inflation remains rampant in the UK, peaking above 10% in July. What’s more, the Bank of England (BoE) has forecast that it could reach 13% and 18.6% in October and January respectively, in line with further increases in the energy price cap.
This is having a huge impact on households nationwide, who are struggling to save their hard-earned cash and make ends meet from month to month. Even if you can save a portion of your earned income each month, this is unlikely to be enough to overcome rampant inflation on these shores. But why does investment offer a more viable option than saving money in the current economic climate?
How is Inflation Affecting Savings?
Inflation describes a general rise in the price of goods and services, including food and fuel. So, when inflation rises, the cost of living also starts to climb, making it harder for households to manage their finances and achieve any kind of financial security.
In the UK, the Bank of England (BoE) sets an inflation target of 2%, which helps to sustain demand for goods, optimise spending and ease the burden placed on debtors. However, when it rises too far beyond this level and at a disproportionate rate to earnings, these trends are reversed as households have reduced purchasing power and less disposable income.
Over time, rising inflation also begins to stunt real wage growth. Current UK wages (adjusted for inflation) declined by 3% and at the fastest rate for 20 years as inflation reached double figures, while the average annual grocery bill increased by £533 to a whopping £5,128.
This demonstrates the challenge facing households, who are effectively banking less money each month while the cost of living continues to soar.
Subsequently, households can commit considerably less to their savings over time, while some may even have to eat into their existing savings to pay bills and live from month to month, making saving money an impossibility.
Is Investment the Answer?
To quell inflation, the BoE has initiated five base rate hikes (the base interest rate in the UK is now 1.75%). Of course, this is done to encourage saving overspending and may help to slow the pace of inflation over time, but it’s unlikely that high street banks will share these increases fully with their customers.
With this in mind, those of you hoping to optimise your earnings and returns in the current climate may want to consider the financial markets.
After all, there’s an increasingly diverse range of assets available to investors through the marketplace, including speculative vehicles that don’t require you to take ownership of underlying financial instruments.
For example, forex trading allows you to speculate on international currency prices, creating a scenario where you can profit from even small price movements regardless of whether they’re positive or negative.
This type of flexibility is key in the current marketplace, while there’s also the potential to open leveraged positions that increase your potential returns and outperform any regular savings account.
Of course, there’s also the potential to lose more than your initial deposit in this instance, so we’d recommend capping your leverage in line with your experience and total capital holdings.
Images courtesy of unsplash.com
